Financing the higher education cost for children ranks among the top goals for many of our clients, and for good reason. As dentists, you understand both the value and soaring cost of higher education and have the wisdom and resources to plan accordingly. Fortunately, there are several ways to save for college; each strategy comes along with its own pros and cons, which need to be examined when deciding which is right for you.
For many people, the use of state-sponsored 529 Plans has been the way to go. The term “529” refers to the section in IRS code that provides tax-advantaged features in these plans. 529 plans are also referred to as “Qualified Tuition Plans.” In Michigan, there are two state-sponsored qualified tuition plans available:
· The Michigan Education Savings Plan (MESP)
· The Michigan Education Trust (MET)
The plan that we most often recommend to our clients is the Michigan Education Savings Plan (MESP). The MESP is an investment account established for purposes of paying higher education expenses. Money is contributed and invested in an age-based investment allocation for the future benefit of your student. MESP investments are subject to decline in down markets just like any other investment. When the student is ready to use the funds in the MESP, whatever has been accumulated is what they have to work with.
Funds accumulated using MESP can be used to pay qualified higher education expenses including tuition, room and board, fees, and the cost of books, supplies, and equipment related to enrollment. The MESP can be used at colleges and universities all over the country, and it allows for unused benefits to be transferred between members of the same family.
The Michigan Education Trust (MET) allows for years of college tuition to be purchased for the future use of a student at today’s price. For example, if you have a child that is 7 years old today, that will begin attending college at age 18 (in the year 2020), you could buy years of tuition now, at year 2009 prices, for that child to use when they enter college in 2020.
The Michigan Education Trust will cover tuition; however, it lacks the flexibility of the MESP to pay for other related expenses.
The following are a few things to consider when deciding whether to use an MESP or MET plan:
1. The MET is good for use if you know that your child is going to attend a public university or community college in Michigan. If your child chooses to attend an out-of-state school or a private school, the MET won’t work as well. It will, however, provide a refund of benefits to the ineligible school based on a weighted average formula.
2. When using the MET program, you are pre-paying tuition and fees. This still leaves books, travel expenses, etc. to be paid out of pocket.
3. Years of tuition purchased under the MET plan must be used with 15 years of agreed upon start date. Funds in MESP have no expiration date.
4. Both MET benefits and MESP account balances and can be transferred to other family members to cover education expenses.
5. Contributions to both the MET and MESP are eligible for a state of Michigan tax deduction.
6. Funds in the MESP are subject to market volatility and could decline in value during down-market periods. At this point, the MET is a guaranteed contract. However, it is important to note that some states have encountered insolvency issues with their pre-paid tuition contracts. So far, this has not been an issue in the Michigan plan.
Monday, April 6, 2009
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